Pay Less Tax

Taxing facts

• Individual Savings Accounts (ISAs) allow you to invest up to £7,000 a year in a tax-efficient wrapper. Have you fully utilised this year’s allowance? Within certain limits you can make investments in cash (at the low-risk end of the scale), insurance or stocks and shares (at the higher-risk end). All proceeds taken are exempt from personal taxation.



• If you are a non-taxpayer, you can claim back tax on interest received from bank or building society accounts. To receive interest gross in the future you will need to complete Inland Revenue form R40. If you are a taxpayer, consider transferring your savings accounts to non-taxpaying spouses.



• If you have made significant investment gains over previous years, it is important to utilise your annual capital gains tax (CGT) exemption. For the 2003/04 tax year, this exemption is £7,900, and any disposals made within this figure would be exempt from CGT. However, gains made on top of that could be taxed at your highest rate tax.



• When was the last time that you considered your inheritance tax (IHT) planning requirements? This tax is charged on a deceased person’s estate worth more than £255,000 (2003/04). It is charged at 40% of the total value of your assets over and above this threshold. Tax may also be payable on transfers of assets made in a person’s lifetime, although gifts usually made more than seven years before a death are exempt.



• You are allowed to transfer £3,000 per annum (gifting allowance) each year to other people without paying inheritance tax. Is it appropriate for you to make a transfer now? You can carry this allowance forward to the next year if you have not used it up in the current year. No IHT is paid on transfers between married couples or on gifts to charities. Any gifts you make within seven years of your death and in excess of the threshold could be subject to IHT.



• Have you made a will and when was it last updated? It’s vital that you do so, as a will can become a crucial weapon when fending off the taxman. Also, if you don’t make a will, you won’t be able to take advantage of certain tax-exempt options, such as leaving money to charity.



• Are you fully funding your pension? Amounts paid into approved personal pension funds can receive tax relief at your highest rate. We can advise you on your appropriate funding levels.



• If your attitude towards investment risk is at the higher end of the spectrum, then a Venture Capital Trust (VCT) could offer you many attractive tax benefits. A VCT can be useful if you need to defer any CGT you owe, as you can transfer gains made within the period running from 12 months before the gain is made and 12 months after to a new issue of shares in a VCT. No CGT is paid until these shares are sold. You can also receive income tax relief at up to 20% on up to £100,000 of your investment each tax year in new VCT shares. Dividends from VCT shares within the annual £100,000 subscription limit are also tax-free and there is no CGT to pay on any gains made within the trust.



• An Enterprise Investment Scheme (EIS) offers tax relief at up to 20% and tax deferral in much the same way as a VCT, but has a higher total upper subscription limit of £150,000 per tax year. An EIS invests in a single business, in contrast to a VCT, which invests in many companies.



• Investing your money offshore in a tax haven can be efficient as interest is paid without deduction of tax, which could be a benefit if you do not pay tax or wish to benefit from gross roll up of interest. You must remember, however, that if you are UK resident and domiciled you must declare the interest (whether distributed or rolled up) to the Inland Revenue as it arises and pay tax on it in the normal way. If you are non - UK domiciled you will only pay tax when you decide to bring the cash back onshore. Certain offshore investments (called “roll-up” funds) allow you to roll up your profits so you can choose when to encash and pay tax. In this way, you can delay being hit with tax until, for example, you are in a lower tax bracket or you retire. You could even avoid paying UK tax altogether if you choose to retire abroad and then encash. Is this an option that you are considering?